While the price freefall in the oil market would naturally give investors cause to worry, Barron’s said it probably isn’t wise to just dump oil stocks any oil stocks you may own.
“Particularly if you are holding stocks that can generate enough cash to meet their obligations through the end of next year. The worst of the oil meltdown will eventually be over, and the world will need oil to power the recovery from the coronavirus,” the financial newspaper said.
Oil companies “that have managed debt well should eventually see a rebound as other producers exit the market and the supply-and-demand balance is restored,” Barron’s explained.
COVID-19 restrictions will eventually ease and businesses and consumers will be buying oil products again, investors were told.
“Today’s price move feels like oil is passing a kidney stone,” said David Winans of PGIM Fixed Income. “A very painful move but it can’t last for long, since producers are switching off wells as we speak.”
Today, the world may need just 75 million barrels of oil a day to keep the economy running. By the end of 2021, though, it will likely need 100 million barrels a day or more, Barron’s explained.
Among the companies well-positioned to succeed is Chevron (CVX), which has reduced spending to conserve capital, Barron’s said. “Chevron in a $30 per barrel Brent environment offers the lowest net debt/Ebitda [earnings before interest, taxes, depreciation and amortization] of the global Super Majors,” Goldman Sachs analyst Neil Mehta wrote last week.
Another stock now attracting positive attention is Schlumberger (SLB), the largest oil-services company in the world. Schlumberger has enough long-term international contracts that it should be able to persevere through the next tough 18 months, Barron’s said.
Benchmark Brent and U.S. oil futures for June delivery plunged to around two-decade lows on Tuesday, a day after U.S. May futures sank into negative territory for the first time in history as demand tumbled due to the coronavirus crisis, Reuters said.
The June contract for U.S. West Texas Intermediate (WTI) crude dropped 21% to $16.14, after hitting its lowest since 1999. WTI for May, in which trading turnover is much lower, hit negative $3.99, after Monday's dive below $0 for the first time, settling at negative $37.63 a barrel.
"The recently agreed supply cuts do little to solve the near-term oversupply problem in the global market," JBC Energy said in a note.
Kremlin spokesman Dmitry Peskov said on Tuesday said leading global oil producers could hold talks again to discuss their output deal further if needed.
U.S. President Donald Trump, who described the drop in the U.S. front-month crude price as a short-term issue caused by a "financial squeeze," said his administration would consider halting imports of oil from Saudi Arabia, the world's biggest exporter who spearheaded OPEC efforts to curb output.
"Negative prices are a temporary glitch reflecting stressed flows in the futures markets and stressed storage conditions somewhere in the U.S. Midwest," Swiss bank Julius Baer's economics head Norbert Ruecker said.
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